Boeing, EADS spend big to lobby opinion on tanker deal

Contract to replace U.S. refueling-tanker jets could change the whole industry

By

ChristopherHinton

NEW YORK (MarketWatch) -- Boeing Co. and Netherlands-based EADS are in a battle that could redraw the boundaries for U.S. defense contracting for years to come.

The nine-year brawl over a $35 billion Air Force contract to replace the military's fleet of aerial-refueling tankers could land the first foreign aircraft-production facility in Boeing's home market, giving EADS a foothold from which to chip away at its archrival's military business.

"You get a U.S. facility and then you have political allies," said Teal Group aerospace analyst Richard Aboulafia. "It gives you an industrial and jobs footprint in the U.S., and that's very concerning for Boeing."

It's a point underscored by the exceptional spending by both companies to influence the outcome.

Over the past two years, as the Pentagon decided on its new aircraft, Boeing
BA, -0.84%
spent more than $34 million to influence government officials, according to OpenSecrets.org, which tracks lobbying money spent in U.S. politics.

During the two prior years, the manufacturer handed out just under $20 million.

EADS (EAD)
EADSY, -1.69%
spent about $7.7 million over the same period, though at the time it was still partnered with Northrop Grumman Corp.
NOC, -0.69%
in pursuit of a deal. Combined, the companies funded their lobbyists with more than $43 million over the 2008 through 2009 period.

From 2006 through 2007, EADS and Northrop Grumman together spent just $25.6 million.

"I think both companies understand that this is a crucial competition and are spending as much money as necessary to position themselves," said Loren Thompson, defense analyst at the Lexington Institute, a Washington, D.C., think tank.

Neither company would say how much they've spent on marketing the planes, but both companies have funded full-page ads in national newspapers, trade journals and magazines, as well as slick-looking Web sites full of multimedia content.

Industry insiders say Boeing appears to be outspending EADS in advertising as it takes its argument straight to Main Street, warning an award to a European-led consortium would hurt U.S. manufacturing and could even jeopardize national security.

"It's been fascinating to watch," said Frost & Sullivan analyst Wayne Plucker, who's been a part of the aerospace industry for more than a decade. Neither company has been entirely honest in their ads, he added.

"There's a lot of word-smithing going on," Plucker said. "Each says they have a ready-to-build design, but truthfully neither of them does. Both claim to have flying examples, but neither do. ...

"What they do have is not current to the specifications the Pentagon is seeking in its proposal, and both will need tweaking."

The campaigns aren't likely to influence Pentagon leaders directly, but are meant to sway public opinion and Congress. Legislators in turn would try to pressure Defense Secretary Robert Gates and procurement officials.

EADS, Airbus push U.S. beachhead

Boeing and EADS formally submitted their bids for a third time last week to begin the task of replacing the Eisenhower-era tankers. Boeing has offered up modified version of its commercial 767 jetliner, while EADS has proposed using its KC-45 an aircraft based on its Airbus subsidiary's A330. See full story about the respective tanker bids.

The process has so far taken nine years, with Boeing losing the original contract in 2004 after a procurement scandal that involved bribing government officials. EADS and partner Northrop Grumman won the contract four years later -- but then lost it after the government agreed with Boeing's claims that the bidding process had been sloppy.

Northrop Grumman later dropped out of the contest entirely, accusing the Pentagon of re-writing the third bid request to favor Boeing.

If EADS, bidding on its own, does eventually land the Air Force job, it would set a precedent that could jeopardize Boeing's share of the defense market. The company is currently the second-largest military contractor to the U.S. in terms of sales, just behind Lockheed Martin
LMT, -1.43%

EADS has offered to build the KC-45 in Mobile, Ala., which would be its first production facility in North America.

If that were to happen, Boeing may phase out its 767 model line since commercial orders for the jet have been dwindling for some time.

Boeing and EADS are focused on lining up supporters to call and write their congressmen.

Along these lines, EADS's KC45.com site has a "Write to Congress" option and provides a template for emailing senators and representatives, while Boeing's site offers free "American Designed and Built" bumper stickers.

In a statement, Boeing said it wants to reach both military personnel and taxpayers with its marketing in part to counter any distortions from its competitor.

A prime focus for the campaigns has been American jobs, with Boeing claiming its tanker replacement would support 50,000 jobs, and EADS saying its plane would support 48,000.

Analysts cautiously back those numbers, noting it's not clear how many jobs would be "created" rather than "supported," and adding that the difference is likely from European workers providing the KC-45 airframe.

The $35 billion contract to build 179 aerial-refueling tankers will also provide the winning company with years additional revenue for parts and services. Some planes in the current fleet have been flying for more than 50 years, and a similar timeframe would easily tack on an additional $70 billion to the original agreement.

Eventually the Air Force would want to replace its entire fleet of 400 tanker planes, and that could mean more than a decade of assembly-line work.

"This is the biggest new start of a military program in years," said the Lexington Institute's Thompson.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.